Why you should deduct your home office
January 15, 2008 · Print This Article
I frequently hear from small and home based business owners that they don’t take the home office deduction because they are afraid of being audited.
The home office deduction has been labeled as a red flag for years, but I think this deduction has too many benefits to just ignore it.
Robert Flach of The Flach Report agrees with me. In his post "Three Cheers for the Home Office Deduction" Robert tells us why the home office deduction is great:
1. It moves part of a deduction that would have been claimed on
Schedule A (real estate taxes and mortgage interest) to Schedule C and
as a result reduces your Adjusted Gross Income (AGI). While
a home office cannot generally be used to create a loss on Schedule C,
you can generate a net loss to the extent of the business use
percentage of real estate taxes and qualified mortgage interest. A home
office deduction in general will reduce your AGI, and reducing your AGI
can increase a whole laundry list of deductions and credits. See my
WANDERING TAX PRO post on “The Most Important Number on Your Tax Return”.
2. It reduces not only your federal and state income tax but also your self-employment tax. The home office deduction could provide 40% to 50% in total tax savings!3. And, perhaps most important, it establishes your home as a place of
business for the purpose of deducting business mileage. You have no
“commuting”. Every time you leave your home to drive to another business location (a client, the office supply store, your business bank) you have deductible round-trip business mileage.
You no longer have to be afraid of claiming a home office
deduction. I do not believe that it raises the same “red flag” with the
IRS that it did in the 1980s and most of the 1990s. And you no longer have to pay tax on the business use percentage of the gain when you sell your residence.
All you have to do is “recapture” the depreciation claimed after May 6,
1997. Prior to 1997, if you had a $100,000 net gain on the sale of your
residence and you used 10% of the building as a deductible home office
you would have to pay tax on $10,000 plus the total amount of
depreciation claimed on the home office over the years.
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